Sandoz's Biopharmaceuticals Sales Growth Justifies Development Work

Key View: Sandoz's overall Q218 sales have been hampered by US sales, which continue to be troublesome for Sandoz; with several consecutive quarters of declines, US sales are now at their lowest point since before Q114. Biopharmaceuticals sales are proving to be an increasingly bright spot for Sandoz. Whilst they remain a small part of total revenues, they are showing healthy growth, justifying the work the firm has put into developing its market-leading biosimilars position.

Novartis has announced its Q218 results for the period ended June 30 2018. Included in these were the results for its generics and biosimilars subsidiary, Sandoz. Total sales for Sandoz for the latest quarter reached USD2,463mn, flat against the results for Q217, rising by 0.5% over the USD2,451mn reported then. The Q218 net sales figure was down by 2.1% over the USD2,517mn reported for Q118. Novartis noted that Sandoz saw nine percentage points of price erosion in Q218 compared to Q217, mainly in the US. However, this was largely offset by volume growth of seven percentage points. Excluding the US, net sales grew by 5% in constant currency terms.

Sandoz's operating income in Q218 was reported at USD328mn, flat against the USD330mn reported a year earlier, representing a decrease of 0.6%. Compared to the USD409mn reported for Q118 however, this was a fall of 19.8%. The decrease over the prior year period was mainly through lower sales and higher US marketing and sales investments, partly offset by a legal settlement gain. Core adjustments amounted to USD152mn, including USD95mn of amortisation, compared to prior year adjustments of USD167mn. Core adjustments decreased compared to Q217 as a legal settlement gain more than offset higher restructuring and impairment charges. Core operating income was USD480mn, down by 3.4% over the USD497mn reported for Q217 and down by 3.8% over the USD499mn reported for Q118.

Sandoz's net sales have remained relatively stable in recent years, fluctuating between a low of USD2,318mn in Q114 to a high of USD2,605mn in Q416. For much of the period between Q114 and Q218, it has remained around the USD2.5bn mark. However, Sandoz has now reported three consecutive quarters of decreases, falling from USD2,595mn in Q417 to USD2,517mn in Q118 and now USD2,463mn. Even if the decrease continues at the same rate in Q318, Sandoz's net sales are unlikely to fall below those reported for Q114, but equally, a relatively modest improvement in Q318 will see sales grow above USD2.5bn once again.

Sandoz Sees Three Quarters Of Declining Revenues

Sandoz's Quarterly Top-Line Results (USDmn)

Source: Novartis, BMI

US Sales Continue To Falter

Europe remained Sandoz's largest region in terms of sales in Q218; revenues here were worth USD1,237mn, up by 12.9% over the USD1,096mn reported in Q217, but down by 4.3% over the USD1,292mn reported in Q118. European sales accounted for 50.2% of Sandoz's total revenues for this latest quarter, compared to 51.3% in Q118. Novartis reported Sandoz's European sales were driven by biosimilars mainly in Germany, Italy and the UK.

US sales have continued to plummet. In Q218, US sales were worth USD692mn, down by 15.6% over the USD820mn reported in Q217, and down by 2.3% over the USD708mn reported in Q118. Novartis reported that the decrease over Q217 was largely the result of continued industry-wide pricing pressure including customer consolidation.

Sales in Asia/Africa/Australasia in Q218 reached USD341mn. This was flat against the USD340mn reported a year earlier, but was up by 5.6% over the USD323mn reported in Q118. Sales in Canada and Latin America were reported at USD193mn, down by 1.0% over the USD195mn reported a year earlier, and flat against the USD194mn reported in Q118.

Sales in Established Markets collectively reached USD1,812mn, up by just 0.7% over the USD1,800mn reported in Q217, but down by 2.4% over the USD1,856mn reported in Q118. Established Market sales have remained relatively stable in recent years, fluctuating between a high of USD1,941mn in Q416, and a low of USD1,666mn in Q114. Sales in Emerging Growth Markets in Q218 were worth USD651mn, exactly the same as in Q217, but down by 1.5% over the USD661mn reported in Q118. Similarly to Established Markets, Emerging Growth Market revenues have been stable in recent years, with a high of USD703mn reported in Q317 and a low of USD613mn reported in Q314.

US sales are proving to be problematic for Sandoz. The firm has now seen six consecutive quarters of falling sales in the country, plunging from a recent high point of USD965mn in Q216 to USD692mn in Q218, a fall of 28.3%. In fact, the USD692mn reported for this latest quarter is the lowest amount since before Q114, when US sales were worth USD717mn. Quarterly US sales continue to be in danger of falling below USD600mn in FY18 unless Sandoz can turn its performance in this region around.

Plummeting US Sales Impacting Overall Revenues

Sandoz's Quarterly Sales By Region (USDmn)

Source: Novartis, BMI

Biopharmaceutical Sales Continue To Grow

Sandoz's global Biopharmaceutical sales continue to grow, and whilst still relatively small, these are an increasingly bright spot in Sandoz's revenues, highlighting the emphasis the company has placed on this market. The segment includes biosimilars, biopharmaceutical contract manufacturing and sales of Glatopa, a generic equivalent of Teva Pharmaceutical Industries' multiple sclerosis product, Copaxone (glatiramer acetate), that Sandoz developed with Momenta Pharmaceuticals.

In Q218, Biopharmaceutical sales were worth USD363mn, up by a considerable 39.6% over the USD260mn reported a year earlier, and up by 8.4% over the USD335mn reported in Q118. Novartis reported that Sandoz's Biopharmaceuticals sales were driven by growth in both Europe and the US, although the firm has not broken the sales figures down. According to Novartis, by region, Europe continued strong double-digit growth, driven by Rixathon (rituximab) and Erelzi (etanercept), launched in H217. In the US, growth was driven by Zarxio (filgrastim) and Omnitrope (somatropin; not approved through the abbreviated biosimilar regulatory pathway established by Congress).

Sandoz's Biopharmaceuticals sales are the highest it has recorded and the firm has now seen three consecutive quarters of growth. The USD363mn reported in Q218 is up by 95.2% over the low point of USD186mn reported in Q315. In this latest quarter Biopharmaceuticals sales accounted for 14.7% of total Sandoz revenues; again, this is the highest amount the segment has achieved to date. Biopharmaceuticals remain a small part of Sandoz's revenues, but its growth has become increasingly healthy, suggesting this segment's importance will grow in stature.